Deal makes IBM the keeper of the world's largest open source software portfolio.

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This is no trick, and whether it's a treat remains to be seen: IBM and Red Hat executives announced Monday that IBM is acquiring the open source software and cloud services company in a $34 billion cash deal.

Red Hat will remain a standalone business unit within IBM, and an IBM spokesperson said that IBM "will remain committed to Red Hat’s open source ethos, its developer community and its open source community relationships." Red Hat will maintain its current leadership team and remain in its current headquarters and facilities. The culture will remain as well—though it's possible IBM and Red Hat may cross-pollinate a bit more than they have in the past.

In a webcast, IBM Senior Vice President of Hybrid Cloud Arvind Krishna and Red Hat Executive Vice President and President of Products and Technologies Paul Cormier echoed the spokesperson's statement, stating that all of Red Hat's existing partnerships with other cloud providers and all of Red Hat's open source development projects—including Red Hat Enterprise Linux, the OpenShift implementation of Kubernetes-based containers, and the OpenStack cloud computing platform—would continue as before. Likewise, Krishna said that IBM would continue its partnerships with other Linux distributions.

Considering Red Hat's position as the leading Linux distribution provider in the business world, as well as the top operating system provider for cloud computing, that's probably a very good idea. IBM has long been a partner with Red Hat, even porting Red Hat Enterprise Linux (RHEL) to its mainframe platforms. RHEL, Krishna said, is the top operating system on IBM's z System mainframes, and that has been driven largely by customer demand to run the services supported by RHEL in a mainframe environment. And over the past 16 years, Red Hat's culture has shifted from being a commodity Linux distribution toward something more like IBM's corporate culture.

"We're not an open source company," said Cormier. "We're an enterprise software company with an open source development model. Red Hat's secret sauce is we've put those two things together. And we've both done that—IBM has a huge history of enterprise-grade software and open source development. The reason why [Red Hat] moved product and engineering to the Boston area is because we wanted engineers who had worked on enterprise products."

For IBM, the acquisition is about growing IBM's business in the cloud—private, public, and hybrid—based on the position of the company as the open source and open standards player versus the "proprietary" models of Microsoft, Amazon, and other major cloud players. For Red Hat, the deal is about scaling up the company's reach. "We can scale at greater speed," said Cormier, "not just from a Kubernetes perspective, but even with the RHEL base. We can only reach a certain number of customers right now."

Because IBM is counting on open source to cement the company's credibility as a cloud player, it's doubtful that the fallout of the acquisition will follow the path of, say, the Oracle acquisition of Sun. IBM has a good track record with open source—the Eclipse development platform and other contributions to Java, for example, as well as IBM's royalty-free patent contributions to the Open Invention Network to support development of the Linux platform. So this may be a good thing. Right?

Of course, the SCO-IBM lawsuit is still going, so that's a thing. IBM has a countersuit against SCO (suing over IBM using Unix stuff in AIX) that claims SCO (then Caldera) "copied and distributed hundreds of thousands of lines of IBM code, which IBM contributed to Linux under the GPL, after SCO lost permission to do so by repudiating and breaching the GPL. "

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Sean Gallagher
Sean is Ars Technica's IT and National Security Editor. A former Navy officer, systems administrator, and network systems integrator with 20 years of IT journalism experience, he lives and works in Baltimore, Maryland. Emailsean.gallagher@arstechnica.com//Twitter@thepacketrat

Fuck'n disaster. Red Hat had an opportunity to lead in the enterprise k8s/container space and they took the money instead, albeit a truckload. I may have done the same thing or may have a different opinion if I owned hundreds or thousands of Red Hat shares but as a person that has spent the last two years evaluating container orchestrators and then the last two months implementing it, Openshift, I want to jump off a bridge. Enron would have run Red Hat better than IBM. .

No good will come from this. IBM's corporate environment and financial near-sightedness will kill Red Hat. Time to start looking for a new standard bearer in Linux for business.

I agree. Redhat has dev offices all over. A lot of them in higher cost areas of the US and Europe. There's no way IBM doesn't consolidate and offshore a bunch of that work.

This. To a bean counter a developer in a RH office in North America or Europe who's been coding for RH for 10 years is valued same as a developer in Calcutta who just graduated from college. For various definitions of word 'graduated'.

I'm just waiting until some major company decides that some of the nicer parts of middle America/Appalachia can be a LOT cheaper, still nice, and let them pay less in total while keeping some highly skilled employees.

I would actually take that deal.

This is already beginning to happen - there is a fairly strong startup culture in Iowa. Not to go off on a tangent, but it would be great if we had infrastructure and training programs in place to make this happen on a large scale.

I just can't comprehend that price. Cloud has a rich future, but I didn't even know Red Hat had any presence there, let alone $35 billion worth.

Yeah the price is nuts, reminiscent of FB's WhatsApp purchase, and maybe their Instagram purchase.

If you actually look at the revenue Amazon gets from AWS or Microsoft from Azure, it's not that much, relatively speaking. For Microsoft, it's nothing compared to Windows and Office revenue, and I'm not sure where the growth is supposed to come from. It seems like most everyone who wants to be on the cloud is already there, and vulns like Spectre and Meltdown broke the sacred VM wall, so...

AWS revenue was $26.7B annualized based on Q3 results, that's pretty significant. Azure was $26.7B for the 12 months ending 9/30 (though it's hard to compare the two since the Azure revenue has a component of self-canibilization since O365 revenue often eats traditional Office revenue). Neither number is what I'd call insignificant and both are growing at large double digit percentages.

0365 revenue isn't counted as Azure. O365 doesn't even run on Azure except for authentication.....

Yes. Thankfully, they're (finally) starting to move away from it. Interestingly enough, the use of Notes for e-mail has had the (likely unintended) side effect of driving rapid adoption of Slack within IBM for a lot of internal communication.

IBM has been fumbling around for a while. They didn't know how to sell Watson as they sold it like a weird magical drop in service and it failed repeatedly, where really it should be a long term project that you bring customer's along for the ride...

I had a buddy using their cloud service and they went to spin up servers and IBM was all "no man we have to set them up first".... like that's not cloud IBM...

If IBM can't figure out how to sell its own services I'm not sure the powers that be are capable of getting the job done ever. IBM's own leadership seems incompatible with the state of the world.

IBM has been the primary outlet and support organization for Apple's corporate outreach. They have a few years experience with that and it seems to be going well. I assume they have learned some lessons.

What's weird about this is that IBM isn't actually buying very much. Redhat's ongoing value proposition is the quality of its people, and any of those people can leave any time they want. What keeps them is, presumably, good challenges, good pay rates, and good management.

IBM is really bad at providing all three of those, so I assume that RH will immediately begin to leak away the thing that IBM supposedly bought. So I can't imagine that $34 billion could even remotely be justified under any circumstance, because IBM isn't buying much tangible. They'll have a captive customer base for awhile, but as you can see from this very thread, as soon as the news gets out, those clients will be re-evaluating their relationship with Red Hat Linux, maybe Linux in general.

In other words, Red Hat is valuable because of who they are, and being bought by IBM instantly begins to destroy this identity. Great, great move for RH stockholders, assuming they get out of their IBM stock as soon as they can. Very bad one for almost everyone else. Even if you don't have a financial interest in either company, chances are nearly certain that you interact with code written by a Red Hat employee on a daily basis. The connection may appear tenuous, but this could actually impact your life a little bit.

As another poster pointed out red hat had $260 million in income last year. At that rate it will take IBM 140 years to turn a profit on this purchase.

Actual numbers (which may explain a lot) are here:

Quote:

Red Hat Inc's EBITDA for the three months ended in Aug. 2018 was $167 Mil. Its EBITDA for the trailing twelve months (TTM) ended in Aug. 2018 was $633 Mil.

During the past 12 months, the average EBITDA Growth Rate of Red Hat Inc was 26.30% per year. During the past 3 years, the average EBITDA Growth Rate was 20.50% per year. During the past 5 years, the average EBITDA Growth Rate was 15.20% per year. During the past 10 years, the average EBITDA Growth Rate was 13.80% per year.

In short: Red Hat is absolutely profitable. Investors use EBITDA plus growth rate. In that light Red Hat is doing very well, with continued strong YOY growth.

While 633 mill is still a long way from 34 billion they also have substantial assets and a lot of highly skilled employees (could be rated at 0.25 of annual pay for example, if it seems reasonable that they'll stick around)... and finally, as other have mentioned, the price may also be a sign that other buyers where interested. Red Hat would have been a great purchase for any number of players. My bet is on Amazon. They certainly have the money. Which could also explain why the price went up to craze levels.

Microsoft, Google and SAP would also have a clear benefit from purchasing Red Hat. In reality, a large portion of the 34 billion is "keep it out of competitiors hands" payment. Which could be worth every dollar for IBMs long term strategy.

I think it was pretty evident when IBM sold off its personal computer business, then X86 server business to Lenovo that they were looking to downsize their 'Big Iron' reputation and move to more service orientated offerings.Aside from Power, Z and a smattering of storage they are pretty much there and this will certainly help them in that regard. I wonder what this means for AIX.

Having an OS custom built for specific hardware allows for some monumental performance gains, but given the availability of low-cost commodity hardware and operating systems like RHEL and even CentOS, is that performance worth the cost?

With systems like MapReduce and its successors, large dedicated compute frames are becoming obsolete by numerous smaller systems working in unison. If IBM can embrace what it knows about iron and mesh that with RHELs ability to scale horizontally it could be interesting to see. I just hope they do not try to turn RHEL into a highly-customized beast like AIX.

1) Agree with those who say that IBM IS planning on changes - otherwise, why spend all that cash?

2) I've seen IBM ruin a few things - I spent 16 months there over 3 years as an intern in the 1990s, right around "Taligent". AIX was one of the better Unix distributions at the time, IMH.

3) What does IBM get out of it? I would imagine, instantly, they can offer "Full Red Hat support" with every machine they sell. And they can raise rates for competitors significantly. Oh dear, HP - your storage cluster doesn't come with official Red Hat Support for that price? And it would cost you $50k/node/year? So sad.. Guess we'll just take our business over to IBM. They cost 20% more initially, but Red Hat support is only $500/node/year.

Overall - crap. We certify our products on Red Hat. Not sure what this means for 3-4 years down the road.. But, maybe there's a reason I keep running Slackware on my home machine :-)

We run just about everything on CentOS around here, downstream of RHEL. Should we be worried?

I can't believe I'm saying this but I think we're fuc*ed. Maybe not the next 12 months as the acquisition integration happens but you can bet 110% that IBM didn't buy them to allow RedHat to maintain their current prices and model. They clearly said "we're an open source *development model*" ... i.e. you're more than happy to have talented OSS engineers donate time to them but clearly want to change the way things work. It's a business so I don't blame them.

On the plus side, OSS devs aren't going to sit stationary either. But yeah, uncertainty and change is here for sure.

I actually think a solid server distro from (gulp!) Microsoft would be fantastic. A flavor that's engineered and marketed to be "the same as Azure" would make business sense for them and operational sense for developers and ops.

I would much rather MS had bought them. An OS that's GNU/Linux + Windows frontend may be the best of both worlds. Would be a great hybrid for both home-use/gaming and Server/production.

That easy? To just abandon Win32, switch to Linux kernel, and only keep the Windows-esque desktop? They tried a gentle push to UWP without touching Win32 *at all* and look what happened? No one cares about UWP. That's just the client side. What would they do with AD Exchange IIS Sharepoint.... ? Redevelop all of it? MS ecosystem is vast and there is no way to steer it around sharp corners without breaking a lot of things.

Oh backwards compat would not really be supported. Would require a fresh start.

I was bothered until I remembered that my first experience with Linux was on an IBM Thinkpad. Hopefully this will help give RHEL some momentum and then some company will buy them up and plant bluefish in the code.

I work at IBM, some of the old dogs still use Notes, but the default mail client now is Verse.For what’s its worth, it’s one of the best (designed) mail clients out there, heck I’ll go on to say that it’s better than Gmail or Outlook.

I work at IBM, some of the old dogs still use Notes, but the default mail client now is Verse.For what’s its worth, it’s one of the best (designed) mail clients out there, heck I’ll go on to say that it’s better than Gmail or Outlook.

A-Team at Red Hat leaving because of antiquated management style of IBM, could be what hurts RH more than just about anything else. All these orgs try to present a monolithic corporate presence and it is easy to forget they are all made up of individuals and some of those individuals are far more productive than others.

I can't believe IBM hasn't lock'em down with the golden handcuffs yet.

Redhat was a public company (e.g. stock is liquid, early people already fully vested), it would be quite hard to do unless people have lots unvested stock.

I just can't comprehend that price. Cloud has a rich future, but I didn't even know Red Hat had any presence there, let alone $35 billion worth.

Yeah the price is nuts, reminiscent of FB's WhatsApp purchase, and maybe their Instagram purchase.

If you actually look at the revenue Amazon gets from AWS or Microsoft from Azure, it's not that much, relatively speaking. For Microsoft, it's nothing compared to Windows and Office revenue, and I'm not sure where the growth is supposed to come from. It seems like most everyone who wants to be on the cloud is already there, and vulns like Spectre and Meltdown broke the sacred VM wall, so...

AWS revenue was $26.7B annualized based on Q3 results, that's pretty significant. Azure was $26.7B for the 12 months ending 9/30 (though it's hard to compare the two since the Azure revenue has a component of self-canibilization since O365 revenue often eats traditional Office revenue). Neither number is what I'd call insignificant and both are growing at large double digit percentages.

0365 revenue isn't counted as Azure. O365 doesn't even run on Azure except for authentication.....

You're talking financial reporting, he's talking technical. Your right - the cloud returns from Microsoft is split over two categories and is difficult to tell apart what is O365 (cloud) and what is traditional on-prem Office. The way I see things going though, that distinction will be immaterial as for all practical purpose Office = Cloud.

Anyone who claims that what AWS or Microsoft gets from Cloud is "not that much" obviously doesn't know what they're talking about. It's already a multi-billion dollar industry and makes big portions of their respective revenue.

To add injury to insult to claim O365 "just uses Azure for authentication" does not understand that O365 is essentially a software built on top of Azure services in the same data centers. I could go through all workloads, but I'll leave it with that statement.

The poster about "I don't know where the growth is supposed to come from" does not understand the cloud business at all. I will admit that I don't understand this particular move myself simply because I don't know IBM well enough, but trying to get a slice of the action is definitely the right move.

Then, will Microsoft or Google will buy Canonical ltd, company behind the Ubuntu Linux? It seemed improbable before this deal, but I changed my mind. Someday, Ubuntu also will be sold to other major software giant like Google or even MS.

If I were to bet, I would go with MS. They already have been cozying up to canonical later. And Google can always fork their version of linux and move on.

See Android and ChromeOS - they also have their own version of Debian for GCP.

I work at IBM, some of the old dogs still use Notes, but the default mail client now is Verse.For what’s its worth, it’s one of the best (designed) mail clients out there, heck I’ll go on to say that it’s better than Gmail or Outlook.

And yet nobody has heard of it. You can make great software but screw it up in a multitude of missteps. Novell had great software as well, but look where it ended up.

Yes you’re right, that is one of the many pitfalls of IBM, they’re doing so many wonderful things within the company that no one outside the company hears about. Mostly due to incompetence at the manegerial level or corporate politics.

Years ago, my old startup was acquired by Red Hat. They eventually killed/buried the product for which they acquired us. They sold the customer list to someone else in the same space, and phased out support over time, and there's no way to even get the old product anymore.

Every few years or so, I've tried to contact someone to get the rights to that software back, so I could being the process of isolating and open sourcing any useful bits and pieces. (The software was written using information from NDAs, so it couldn't be open sourced back then, and untangling it wouldn't necessarily be simple now, but I'm motivated.)

(And yeah, they just need to sign off on the rights, nothing else. I provided support for them even after I was no longer an employee, so I still had legit/approved access to the source code on that basis. But I'm not going to use it in a way the current IP owner doesn't approve of. I take that kind of thing seriously.)

Perhaps someone can explain this... Red Hat's revenue and assets barely total about $5B. Even factoring in market share and capitalization, how the hey did IBM come up with $34B cash being a justifiable purchase price??

Honestly, why would Red Hat have said no?

Valuation is typically a function of either future earnings potential or value to you as a company to not have to compete/not have your competitors purchase it.

The first of these is fairly easy to calculate... the S&P 500 standard is around 16 or so P:E... that is, a company is worth about 16x their annual earnings. For a stable company with limited growth that might be a lower multiplier and for a growing company that might be a higher multiplier (the market expects they will either shrink into or grow into a "correct" valuation).

The second is more akin to what Facebook did with Instagram... it had no real earnings and no real earning potential at the time it was purchased, but in Facebook's case it gave them the opportunity to better compete with Snapchat which was starting to eat away at their core business. It was worth it to Facebook at the time, even if the fundamentals didn't show it. I think time has shown Facebook made a good bet.

As for this, I expect it's a combination of both. IBM is going to lose mainframe business to cloud providers, and RedHat helps them shore that up. Additionally, RedHat has earnings which can contribute to IBM's bottom line. Without digging into the quarterly reports I can't say if this was a good deal based on the fundamentals, but from a business strategy perspective it looks good, assuming IBM didn't overpay.

Source: Am MBA, but it's been a few years since my last business finance class...

Perhaps someone can explain this... Red Hat's revenue and assets barely total about $5B. Even factoring in market share and capitalization, how the hey did IBM come up with $34B cash being a justifiable purchase price??

Honestly, why would Red Hat have said no?

IIRC when companies vastly over pay for another company they're hiding financial losses or something somewhere else.

Big corporations acquiring a small company tend to start adding layers of restrictive regulations and non-technical management, who then start treating their more eclectic star teams like interchangeable human resource units. IBM will need to avoid this tendency if it expects Redhat to remain exceptional. It is no accident that Sun experienced massive tech flight after being purchased by Oracle.

IBM are paying around 12x annual revenue for Red Hat which is a significant multiple so they will have to squeeze more money out of the business somehow. Either they grow customers or they increase margins or both.

IBM had little choice but to do something like this. They are in a terminal spiral thanks to years of bad leadership. The confused billing of the purchase smacks of rush, so far I have seen Red Hat described as a cloud company, an info sec company, an open source company...

So IBM are buying Red Hat as a last chance bid to avoid being put through the PE threshing machine. Red Hat get a ludicrous premium so will take the money.

I think IBM has benefitted tremendously from OSS and Linux, and this is a good fit for them... like others, I'm interested to see whether a purely commercial company will be a good steward of a major open source software product, but at least there are multiple distributions of Linux, so Red Hat is certainly not the only way to acquire it.

I always find these statements a bit funny. Is Red Hat is not a purely commercial company as well? I mean, apparently they're worth $34 billion. That's not a non-profit they're running over there. Is there even a definition of "non commercial company"? Saw the same thing with the GitHub purchase. Just because they are involved in open source doesn't make them any less commercial. Is contribution of code to Linux your metric? Because IBM is right up there with Red Hat, along with Intel, Google, AMD, Microsoft, Samsung, Mellanox, Renesas, and SUSE. So what exactly makes Red Hat a, presumably, "not purely commercial company" that excludes the rest of this list (sans SUSE I assume)?

No good will come from this. IBM's corporate environment and financial near-sightedness will kill Red Hat. Time to start looking for a new standard bearer in Linux for business.

I agree. Redhat has dev offices all over. A lot of them in higher cost areas of the US and Europe. There's no way IBM doesn't consolidate and offshore a bunch of that work.

This. To a bean counter a developer in a RH office in North America or Europe who's been coding for RH for 10 years is valued same as a developer in Calcutta who just graduated from college. For various definitions of word 'graduated'.

I'm just waiting until some major company decides that some of the nicer parts of middle America/Appalachia can be a LOT cheaper, still nice, and let them pay less in total while keeping some highly skilled employees.

I would actually take that deal.

This is already beginning to happen - there is a fairly strong startup culture in Iowa. Not to go off on a tangent, but it would be great if we had infrastructure and training programs in place to make this happen on a large scale.

Not sure I'd go to Iowa. Maybe parts of Idaho or eastern Oregon or somewhere like that. Not too bad in the summer, but nearby mountains for skiing Kansas City in general seems like it's OK, although never visited there. Maybe parts of Tennessee or Kentucky would be nice.

Once the Starlink is up and working and we see real-world latencies and bandwidth and cost, maybe finding a good remote job and moving out to a more small city/rural area would be practical for me.

No good will come from this. IBM's corporate environment and financial near-sightedness will kill Red Hat. Time to start looking for a new standard bearer in Linux for business.

I agree. Redhat has dev offices all over. A lot of them in higher cost areas of the US and Europe. There's no way IBM doesn't consolidate and offshore a bunch of that work.

This. To a bean counter a developer in a RH office in North America or Europe who's been coding for RH for 10 years is valued same as a developer in Calcutta who just graduated from college. For various definitions of word 'graduated'.

I'm just waiting until some major company decides that some of the nicer parts of middle America/Appalachia can be a LOT cheaper, still nice, and let them pay less in total while keeping some highly skilled employees.

I would actually take that deal.

This is already beginning to happen - there is a fairly strong startup culture in Iowa. Not to go off on a tangent, but it would be great if we had infrastructure and training programs in place to make this happen on a large scale.

Not sure I'd go to Iowa. Maybe parts of Idaho or eastern Oregon or somewhere like that. Not too bad in the summer, but nearby mountains for skiing Kansas City in general seems like it's OK, although never visited there. Maybe parts of Tennessee or Kentucky would be nice.

Once the Starlink is up and working and we see real-world latencies and bandwidth and cost, maybe finding a good remote job and moving out to a more small city/rural area would be practical for me.

We run just about everything on CentOS around here, downstream of RHEL. Should we be worried?

I don't think so, at least no more than you should have already been. IBM has adopted RHEL as their standard platform for a lot of things, all the way up to big-iron mainframes. Not to mention, over the two decades, they've done a hell of a lot of enhancements to Linux that are a big part of why it scales so well (Darl Mcbride just felt like someone walked over his grave. Hey, let's jump on it a bit too!).

Say what you like about IBM (like they've turned into a super-shitty place to work for or be a customer of), but they've been a damn good friend to Linux. If I actually worked for Red Hat though, I would be really unhappy because you can bet that "independence" will last a few quarters before everyone gets outsourced to Brazil.